It follows the discovery of internal e-mails alleged to show
analysts privately disparaging companies while publicly
recommending their stocks.
New York State Attorney General Eliot Spitzer yesterday
announced the court order requiring immediate reforms in one of
Wall Street’s oldest and largest securities firms which controls
total client assets of approximately $1.5 trillion.
According to Spitzer’s office, an investigation has uncovered
“dramatic evidence that the firm’s stock ratings were biased and
distorted in an attempt to secure and maintain lucrative contracts
for investment banking services. As a result, the firm often
disseminated misleading information that helped its corporate
clients but harmed individual investors.”
Spitzer contends that one analyst made highly disparaging
remarks about the management of an internet company in an internal
e-mail and called the company's stock "a piece of junk," yet gave
the company, which was a major investment banking client, the
firm's highest stock rating.
Another e-mail shows analysts complaining about pressure from
Merrill Lynch’s investment banking division. One senior analyst
wrote: "the whole idea that we are independent of [the] banking
[division] is a big lie."
The allegations add that e-mails show how individual investors
were harmed. A research analyst apparently complained about giving
a buy rating to a poor investment: “I don’t think it is the right
thing to do. John and Mary Smith are losing their retirement
because we don’t want a client’s CEO to be mad at us.”
The court order obtained by Spitzer requires Merrill Lynch to
now make disclosures to investors about its relationship with
investment banking clients and provide more context for its stock
ratings.
Spitzer described the court order as a preliminary step designed
to protect investors while the investigation continues. He said his
office has issued subpoenas to other securities firms.
Merrill Lynch issued a statement yesterday:
“There is no basis for the allegations made
today by the New York Attorney General. His conclusions are just
plain wrong. We are outraged that we were not given the opportunity
to contest these allegations in court.”
It continued,
“The allegations reveal a fundamental lack
of understanding of how securities research works within the
overall capital raising process. They cite a limited number of
employee e-mails, taken out of context, as ‘proof’ that investment
banking had undue influence in determining research ratings. In
fact, these emails prove nothing of the sort.
“E-mails are only one piece of a continuous
conversation, isolated at a single point in time - not the end
conclusion. The e-mails in question show that there was normal give
and take as well as vigorous debate among analysts as they assessed
different companies. These kinds of interchanges are customary and
appropriate. Analysts consider views from a number of different
sources, including the companies they are covering and the
investment bankers who work with those companies, before drawing
independent conclusions. This process is followed throughout the
industry and is part of what has made our capital markets the best
in the world. As with oral conversation, e-mails may include
ill-chosen words and offensive language, but this does not add-up
to evidence of wrongdoing.”
